Ours or theirs?
Outsourcing can be a crucial decision for any start-up. Doing it well can accelerate a product launch and reduce your fixed costs. Screwing it up can leave you vulnerable and stifle innovation. Not doing it at all limits your growth.
After 6 years and having at one point had over 400 staff, I still cannot claim we have found THE answer around this challenge, though we have narrowed down the decision options:
- Define your core functions and do not outsource them (except when you have to!)
Yes, obvious, but not so easy since the challenge here is to define your core functions. I have had many entrepreneurs answer this query having to use the fingers in both hands. If you believe you have more than 2-3 core functions, you need to redefine the word “core.” Core functions define the value you add to your customers and thus where your revenue will come from. These core functions are not the same for every company, even for companies in the same industries. They are mostly defined by the founders’ skill sets and where the team excels.
Many times the decision of core or non-core can be surprising. There is more than one successful online lending company that actually outsources its analytics and decisioning to a third party. You would think that determining whether a customer would pay or not would be core to a credit company, but since a large part of any online business’ economics come from optimized customer acquisition, these players have decided to focus on that side of the equation and outsource the back office. The potential weakness to that model is that if you do become very successful, then your provider might have real leverage over you when the time to renew agreements comes around. The advantage is that you get to start racing much quicker than if you have to build your analytics and decisioning in-house.
In our experience, when we have outsourced functions or roles that could be core but we wanted to quicken launch, we always do so with the intent of replacing the outsourced functions in-house as soon as we can. We will accelerate deployment out-of-house while building our own solution or team. We always tell our outsourced team or providers that we will replace them in the future. Keeping a 100% transparent relationship with your outsourcers can be a very good thing. We have more than once asked outsourcers to hold an invoice to get over a short-term cash crunch and they have always accommodated us.
- Outsource the rest of your functions
Everything that is not core (in our case it is accounting, finance and HR right now…we have also sometimes defined IT, collections and customer service as non-core, though not for our current model) should be seen as outsource-able and evaluated as you would any other purchase decision. Having an in-house function adds some easily-measured direct costs such as rent, systems support and telco as well as some relevant though not as easily tallied costs, such as HR and management time as well as higher efficiencies from having direct control over the task-makers. Outsourcing is not magic. Someone has to pay that rent, telco, etc. so it gets added to your bill, though in theory an outsourcer should have economies of scale that you do not have.
- Continually measure the ROI from your outsourcing decisions
When all is said and done, we have not found the fully-loaded costs to vary more than 12-15% between in-house and outsourcing. Mostly, the decision comes down the whether the outsourcer is good enough so you CAN actually take that function off your hands and thus bank back what is the single most valuable and irreplaceable resource you have: your management’s time and focus.
Our dream, still unrealized after 6 years, is to just have 2-3 core functions in-house and 80% of the staff and tasks outsourced. We have not yet found enough solid providers in Mexico to do this but we will keep looking (note for those of you in Mexico and paying attention, this is a business opportunity)!
An effective outsourcing decision has to account for all the costs, cash and non-cash vs the benefit of having less people, growing faster or simply being able to rid yourself of the to-dos involved with having more direct reports.